Real GDP Per Capita

Real GDP per capita (log scale) $100,000 10,000 1,000 world war 11
  IJnited States China India

  • Key statistic used to measure economic growth and standard of living real GDP per capita

    • Real GDP divided by the population

    • Not a policy goal itself, but a useful summary that measures a nation's economic progress

  • In 2008, the median household income in the United States was ~$50,000

  • In 1908, it was about 15% of that, or ~$8,000 in today's dollars

  • In many countries today, the standard of living is less than it was in the United States over 100 years ago!

  • Why is that?

    NORTH AMERICA AFR SOUTH AMERICA Low income ($899 or less) Middle-low
income, less than $5,000 ($900-4,999) AUSTRALIA Middle-high income,
greater than $5,000 High income ($11,000 or more)

Long Run Economic Growth

Average annual growth rate of real GDP 8.8% per capita, 1980-2008 8
  6 4 2 0 -2 China 4.1% India 3.9% Ireland 1.9% United States 1.5%
  France 1.2% -1.8% Argentina Zimbabwe

  • Gradual progress of the real GDP per capita in the US increased by 1.9% every year

  • Sources of Growth

    • Physical Capital

      • Building and machines today make the average worker much more productive

    • Human Capital

      • Improvement in labor created by education and knowledge in the workforce

    • Technology

      • Technical means for the production of goods and services

Economic Growth on Graph

  • PPF Graph

    • Economic growth results in an outward shift of the production possibilities curve.

    0 0 OE 8

  • In Parkland, point A (y-axis) represents all investment goods and point D represents all consumer goods (x-axis) with B and C in between

    CHINA united 070% vs

  • LRAS Curve

    • The growth in potential output over time can be shown as a rightward shift of the long-run aggregate supply curve

    35b 一 31 30b 一

  • SRAS curve

    • Short-Run to Long-Run: Y1 > YP

    • Initial equilibrium is E1. Eventually, low unemployment will cause nominal wages to rise and leads to a leftward shift of the SRAS curve, so the new equilibrium is at E2


    Aggregate price IRAS SRAS2 El SRASI A rise in nominal wages shifts
SuS leftward. AD Real GDP

  • Short-Run to Long-Run: Y1 < YP

  • Initial equilibrium is E1. Eventually, high unemployment will cause nominal wages to fall and leads to a rightward shift of the SRAS curve, so the new equilibrium is at E2


    Aggregate price level PI IRAS SRASI SRAS2 A fall in nominal wages
shifts SRAS rightward. AD Real GDP

Practice Questions

  • Long-run economic growth depends almost entirely on

    a. Technological change

    b. Rising productivity

    c. Increased labor force participation

    d. Rising real GDP per capita

    e. Population growth

    Answer: b

  • In the AD-AS model, long-run economic growth is shown by a

    a. Leftward shift of the AD curve

    b. Rightward shift of the AD curve

    c. Rightward shift of the LRAS curve

    d. Rightward shift of the SRAS curve

    e. Leftward shift of the SRAS curve

    Answer: c

  • Which of the following is listed among the key sources of growth in potential output

    a. Expansionary fiscal policy

    b. Expansionary monetary policy

    c. A rightward shift of the short-run aggregate supply curve

    d. Investment in human capital

    e. All of the above

    Answer: d

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